MAY NEWSLETTER 2023
Can a borrower utilize points or lender credits with a business loan? The answer is yes, and the advantages / benefits are much the same as they are for personal loans.
Buying points on a commercial loan can lower monthly repayments and potentially save your business money over the life of the loan. Lenders may offer better interest rates and terms to borrowers who buy points. Points can benefit companies which are just starting out, having cash flow issues, and in many cases, point fees can be tax deductible. Be aware however the purchase of points may require a large upfront cash payment. For example, one point is usually calculated at 1% of the total loan amount so one point on a $1 million dollar loan costs $10,000. If the loan is only for a short term, then any interest savings may be small and not worth the upfront fee.
If your business is well established and has a solid monthly cash flow, then you might consider removing upfront costs by getting lender credits. By removing these upfront costs as a result of lender credits, you agree to pay a higher interest rate and higher monthly repayments. If your loan amount is high, then removing closing costs and fees could represent large initial cash savings but result in higher payments. If your loan term is short, then any additional interest charges may be low or manageable.
Lenders use points and credits to cover the risk and costs associated with originating a loan. Different lenders offer varying interest rates and terms so it’s a good idea to check with a number of lenders to find the best deal for your company.
If you’re considering using points or lender credits, make sure you understand the impact they will have on your monthly repayments and cash flow. It’s always a good idea to have an attorney review a loan contract before signing.
Is There an Advantage to Buying Points or Using
Lender Credits on a Business Loan?
If you’ve ever taken out a personal mortgage, you’ve likely heard of loan points or lender credits. Loan points are fees paid by a borrower to reduce the interest on a loan, while lender credits reduce or remove closing costs on a loan in exchange for the borrower paying a higher interest rate.
Consumer Financial Protection Bureau: What are discount points and lender credits?: http://bit.ly/40Jbwmt
Corporate Finance Institute: Commercial Loan: http://bit.ly/3GnN4Pv
Investopedia: Points: http://bit.ly/3GkDIE6
NH Business Review: Some key points about commercial loan points:
Rocket Mortgage: Mortgage Points: http://bit.ly/40JbTxn
How to Combat Rising Interest Rates, Growing Your Debt,
and What that Means to Your Customers
Rising interest rates can impact businesses both positively and negatively. The best way to be prepared is to make sure your company is positioned to take advantage of increased interest on savings or investments and minimize the increased cost of debt. A company’s profitability is tied to its capital structure or debt-equity ratio.
When interest rates go up, it’s harder for a company to service its debt. More of its cash flow will go toward paying higher interest rates, which is especially true if your business has any variable rate loans. Renegotiating variable-rate loans or switching to fixed-rate loans can help you better manage your cash flow. Without effective cash flow management, you may find yourself putting more of your company’s working capital into debt and cutting back on key business operations, such as staffing.
One factor that people often overlook is how interest rate hikes may take up to a year to fully impact the market. As a business owner, you’re likely to have some maneuvering room before rate hikes hit.
If you’re a business owner concerned about the impact of rising interest rates, then register for our free webinar on July 20th, Smart Strategies for Working Capital Under Stress. This is part of our Funding Strategies bi-monthly series of online discussions with leading financial experts designed to help business owners learn smart ways to fund their companies. Click here for FREE early-bird registration using promo code, CAPITAL23, a $29.99 value.
American Deposits: How Can Businesses Prepare for Rising Interest Rates? https://bit.ly/3AYi2uA
Business News Daily: How Interest Rate Hikes Impact Small Businesses: https://bit.ly/3NPtMqM
Forbes: How Rising Interest Rates Can Help or Hurt Business: https://bit.ly/41aGxiy
Investopedia: How Interest Rates Affect the American Market: https://bit.ly/3LDGlTd
The cost of financing your company also goes up with higher interest rates. This can mean slower growth for your business as you avoid taking on more debt or even defer plans for expansion. Cash flow may slow because customers are historically less likely to spend money and more likely to postpone purchases as interest rates go up. Your company risks being squeezed from both sides—less cash flow from lower sales and higher debt costs. About 70% of small business owners say higher interest rates can hurt their companies.
Building up your company’s cash reserves or having a fixed interest credit facility available can be a smart strategy in a climate of rising interest rates. If you have upcoming growth plans, you may want to lock in fixed rate financing for your business now. Plus, having more cash or fixed interest financing available means your company has less risk of disrupting operations.
Some companies can actually benefit from higher interest rates. These are usually businesses with good cash flows and low debt levels. A company can invest excess liquidity and reap earnings on higher interest rates from investments.
When is the Right Time to Consider Recapitalization?
Recapitalization is a financial strategy that alters a company's capital structure by changing its mix of debt and equity, also known as the debt-equity ratio. Recapitalization can improve a company’s financial stability and reduce its risk profile by making key changes to its capital structure. With risk reduction, the intent is for the company to emerge in a solid and healthy financial condition.
Increasing business equity can bring more liquidity, oftentimes at the cost of sharing ownership. Taking on debt can reduce cash flow because of interest and principal payments, but allow a business owner to maintain or regain control and ownership
When a company is considered risky, it may experience any of the following:
a decline in share prices
investors or debtors doubting the ability of the company to service debt in an economic downturn
encounter difficulties obtaining additional funding for growth
Recapitalization may be the right strategic move given certain conditions, including:
Corporate Finance Institute: Understanding how Recapitalization Works: https://bit.ly/3LC27qB
Fresh Books: Recapitalization: https://bit.ly/3LVgFC3
Investopedia: Recapitalization: https://bit.ly/3LWJK0P
If share prices fall, the company can issue bonds or buy back shares increasing the debt to stabilize or increase the share price and dividends.
To reduce debt load: if a company trades debt for equity, this will reduce the level of loan and interest payments. The extra cash and reduced debt payments can improve cash flow and drive growth.
To fund growth: Increasing equity and reducing debt can allow business owners to invest in growth opportunities, as they have more liquidity. These investments may include new equipment, larger inventory or other companies.
To pay out venture capitalists or other investors: a company owner may use debt financing to regain more equity in their business by buying out VC or other types of investors.
To avoid bankruptcy: if debt has become unmanageable, and a company is heading for bankruptcy, recapitalization can improve the financial health of the company so it can avoid insolvency and continue operations.
To deter a takeover: if a company takes on debt and reduces equity then it may be a less appealing target for a hostile takeover as any acquiring company would also be taking on the debt.
There are times in the life cycle of a company when recapitalization makes good business sense. An owner may decide to restructure the debt-equity ratio depending on market forces, the age and history of their company, business control, growth opportunities and possible buyouts or insolvency.
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